Food for Thought
The anti-inflation ethanol argument McCain missed.
2:15 PM, Nov 1, 2008 • By DAVE JUDAY
In a late campaign move intended to wrap up Iowa once and for all (looks like it may have worked), Barack Obama recently announced his plan to increase by two-thirds the federal mandate for ethanol and other renewable fuels. John McCain, unfortunately, may have missed a chance to effectively counter-punch in Pennsylvania, another key battleground state.
McCain, of course, has pledged to do away with ethanol mandates if elected. That promise should play well in Pennsylvania, because unlike Iowans who love their ethanol (the Hawkeye State is home to about 25 percent of total U.S. ethanol production) Pennsylvanians have grown wary of the biofuel's unintended consequences; namely, food inflation.
Indeed, last week the Pennsylvania State Senate passed a resolution that included the following language: "whereas, the Bureau of Labor Statistics reported that the price of basic foods in the United States is currently raising at twice the rate of inflation and is expected to continue to escalate in the future," the Keystone State's Senate is calling on Congress to "create new policies that phase out the use of food crops for biofuel production," and "amend existing food to fuel mandates." This resolution mirrored a similar plan passed by the Philadelphia City Council earlier this fall.
Pennsylvanians are correct in worrying about coming food inflation. The cost of food at home in September was up 7.6 percent over the previous 12 months. Comparatively, the decade average has been 2.3 percent. Moreover, this year's rise in food inflation came even as one of the most important categories of food--meat and poultry--lagged behind in the price increases.
Indeed, meat and poultry is the most heavily weighted component of the household grocery bill under the federal government's consumer price index (CPI) inflation formula. For comparison, fruits and vegetables is the second most heavily weighted component--with about half the projected impact of meat and poultry.
A number of food items have been affected by ethanol's diversion of food into fuel. Cereals and bakery products, for example, have seen a more than 12 percent price hike over the past year. The real inflationary impact of ethanol has just begun to hit the meat and poultry sector, however, because of a structural lag in the industry's supply chain. Indeed, the initial impact of ethanol-driven high corn prices was that more livestock went to slaughter more quickly. The high cost of grain made it uneconomic to keep that meat "on the hoof" as it were.
As of May of this year, going into the summer high meat demand period, the year-to-date slaughter rates were up for beef by more than one percent over the year before (remarkable considering the beef herd from which to harvest is its smallest in about three decades) and for chickens the slaughter rate was up more than 4 percent, nearly 6 percent for turkeys, and more than 10 percent for hogs. Thus, cold storage--frozen inventories--swelled in the summer of 2008, especially of red meat.
Summer traditionally marks a seasonal high demand for meat and poultry, due mainly to the trifecta of all American holidays traditionally celebrated by the grill--Memorial Day, the Fourth of July, and Labor Day. Thus, typical increased demand of this past summer, plus the sales and promotions over that period because of heavy supplies, helped clear out some of those higher than normal frozen inventories. And as supplies dropped, prices increased.
Now, red meat inventories in cold storage as of September 30 were below the September 2007 level according to the USDA. Indeed, the consumer price index (CPI) for meat and poultry grew a full percentage point from August to September (that's 12 percent annualized), compared to just a 0.6 percent monthly increase (7.2 percent, annualized, . . . or slightly less than the past year's pace) in the overall Food and Beverages category. Meat supplies are unlikely to be built up again quickly because live cattle and swine herds have been reduced in the past year.
Cattle on feed, i.e. those beef cattle being prepared for harvest, are down 5 percent compared to this time last year. Likewise, the combined U.S. and Canadian swine herd (the pork industry is highly integrated between the two countries and is typically considered together) is also down this September compared to September 2007. Though the drop in swine is only slight, it is the first time the North American herd has not expanded year over year since the joint census was started in 2003.
Moreover, the cost of producing meat is up. Consider that most of the red meat processed from now on, will come from animals who were fed corn this past spring and summer when corn prices hit record highs of between $6 and $7 per bushel. In the past 25 years, the annual average farm price of corn has averaged above $3.00 only once, in the crop year 1995-96. Moreover, corn has been priced above $2.50 only a total of 11 times in the past 30 years prior to federal ethanol mandates, even dropping to below $2.00 for the five year period 1997-98 through 2001-02, according to the University of Illinois.
So the bottom line is this: There is less meat in the wholesale and retail freezer, there are fewer animals to slaughter, and there is a higher cost to raise those animals. It all adds up to inflation--higher prices for Thanksgiving, Christmas, and New Year's turkeys, roasts, and hams, and for those Philly cheesesteaks and pork sausages in Pennsylvania, and around the country in 2009.
Politically, this food inflation trend will be in full force for the next president's inauguration, and will coincide with fragile consumer confidence and a sluggish economy. There are two diametrically opposed campaign promises on ethanol mandates--which of course is the policy at the root of more expensive beef, pork, chicken and turkey. Barack Obama's policy would feed the inflation. John McCain's would starve it.
Dave Juday is a commodity market analyst.